Costco Stock Continues To Justify Its Lofty Multiple Ahead Of Today’s Earnings

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Costco stock - Costco Stock Continues To Justify Its Lofty Multiple Ahead Of Today’s Earnings

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If last week’s Costco (NASDAQ:COST) sales beat is any indication, the warehouse retailer will probably report higher-than-expected earnings and revenue when it releases its first quarter results after the market close today. COST stock surged on Dec. 6 following the upbeat same-store and comparable-store sales numbers.

What was clear from the estimate-topping numbers is that despite concerns over tariffs and the economy, customers continue to shop at Costco. With the seemingly unstoppable sales growth, COST stock shows itself as a buy on any dip, or maybe even when it does not dip.

During its first quarter, same-store sales grew by 8.8%, much higher than the expected 6.5% growth. Comparable-store sales showed an 11% increase, while e-commerce sales rose by 32.3%. COST stock rose almost 3% in trading following this news.

Worries Vanished With Sales Beat

Worries over tariffs and tax changes had caused concerns. However, numbers reassured Wall Street. It also should give COST stockholders some confidence heading into today’s earnings announcement.

Consensus earnings estimates for the quarter stand at $1.62 per share. If it holds, that will represent an 11.7% increase from the same quarter last year, when COST earned $1.45 per share. Wall Street also forecasts revenues of $34.6 billion, an 8.6% increase year-over-year. Given the better-than-expected same-store sales numbers, Costco should meet or exceed expectations as it has in previous quarters.

Costco Stock Continues to Justify Its Multiple

This also shows that Costco stock defines the concept of expensive-but-worth-it. Most of the company’s offerings sell for reasonable prices. The glaring exception remains COST stock itself. While it may look cheap compared to Amazon (NASDAQ:AMZN), with its price-to-earnings (PE) ratio at 32, the stock remains well above multiples for Target (NYSE:TGT), at 11.3, and BJ’s Wholesale Club (NYSE:BJ), at 20.9.

Still, the companies most often called Costco’s competitors may serve as the greatest testament to the company’s competitive edge. Sam’s Club remains its most direct peer. Yet, it so far surpasses Sam’s in revenue and sales that the Walmart (NYSE:WMT) warehouse club rarely receives any mention. The same goes for BJ’s, though it remains a regional player.

No Warehouse Discounts for Costco Stock

Also, almost nothing seems to stop Costco stock. The rising competitive threat of Amazon slowed sales growth in the middle of the decade. However, the company has since recovered. The perception of these events took COST stock down for a time, but a recovery came relatively quickly. Still, for the last five years, the PE has remained at or near the current 30 level.

In the past, I have encouraged buyers not to pay this multiple. Honestly, I still prefer trying to buy Costco stock at a lower valuation. That said, I have to concede that investors will probably win with COST stock long term at current levels. Also, no significant deviations from the multiple have stood for any length of time since the financial crisis. If that downturn did not stop the shares, I see nothing that will.

Bottom Line on Costco Stock

The latest same-store sales numbers serve as yet another reminder of the strength of Costco stock. The bump that followed news of same-store sales numbers that greatly exceeded estimates gave Wall Street some reassurances that tariff and economic issues may be less severe than thought. It also makes strong earnings and revenue numbers for the first quarter a near certainty.

More importantly to Costco investors, it again confirms the inherent strength of this company. As a result, COST stock holds one of the higher PE ratios among brick-and-mortar retailers and likely will for years to come. To be sure, the Costco stock price falls at times. Still, given the multiple, I would encourage buyers to wait for such a dip.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/costco-stock-justify-multiple/.

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